Managing the EZ-Way Part II

A proper ranch management analysis must be based upon on-farm data specific to that ranch. It's from such data that long-term drought solutions and planning are born. To learn where money was made (or lost) in 2002, start by dividing your ranch into profit centers. Each profit center will then be treated as a stand-alone business. As an example, let's conduct a profit center analysis for the case

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A proper ranch management analysis must be based upon on-farm data specific to that ranch. It's from such data that long-term drought solutions and planning are born.

To learn where money was made (or lost) in 2002, start by dividing your ranch into profit centers. Each profit center will then be treated as a stand-alone business.

As an example, let's conduct a profit center analysis for the case ranch introduced in my July column, “Managing post-drought, the EZ-Way” (page 12).

This case ranch consists of three profit centers — beef cows selling calves at weaning, feed crops and cash grain crops. Last month's analysis was for the total ranch. This month, we'll focus on the individual profit centers within the business.

This rancher's 2002 on-farm beef cow data is shown in Figure 1. This data was obtained from his Integrated Resource Management cost & return analysis for his 153-head cowherd. This herd's data is divided into two major categories — the herd's $110/head overhead costs (summarized on the left side of Figure 1) and its $210/head direct costs (summarized on the right side).

Overhead costs are further broken into fixed asset costs ($40/cow) and pasture costs ($70/cow) for a total of $16,830 for the beef cow profit center. No family living draw is placed against this cowherd as family living comes from off-farm employment.

Accrual adjusted gross income per cow is $458/beef cow. Direct costs per $1 of income were 46¢ ($210 divided by $458). Gross profit margin (gross income minus direct costs) is 54¢ per $1 of gross income generated. Thus, of each $1 of gross income, 54¢ remained to pay overhead and profit.

Now, let's build an EZ-Way graph, described last month, to analyze just the beef cow profit center ( Figure 2). The $16,830 fixed costs for the cows are represented by the horizontal line at the $16,830 level. The 46¢ in direct costs/$1 of gross income begins at the left end of the overhead cost line (point 16830,0 on the graph) and slopes upward and to the right at $210/cow.

The final gross income line starts at the graph's origin (0,0) and slopes up at the $458/cow. The vertical line labeled A is the breakeven level of beef cow numbers, while vertical line B signifies the 153 cows in 2002. That's our EZ-Way graph for the beef cow profit center.

The crossing of the gross-income and the direct-cost lines in Figure 2 indicate it took the profit of 68 cows to cover the overhead costs of the beef cow profit center. The remaining 85 cows generated $21,168 total profits from the beef cowherd. In the 2002 drought, this rancher could have depopulated up to 85 cows and still broke even with his beef cow profit center.

Figure 3 summarizes the on-farm crop data collected for the 1,529 acres farmed in the crop profit center on this ranch. In 2002, this ranch produced 599 acres of spring wheat, 400 acres of alfalfa, 300 acres of broom-clover hay and 230 acres of oat hay — a total of 1,529 cropped acres. Both cash and feed crop data are shown in Figure 3.

Crop overhead costs were allocated on a per-crop-acre basis. Hired labor was $2.83, real estate and property taxes were $4.35, interest on machinery and land was $12.97, depreciation was $8.64, while miscellaneous costs totaled $6.75/acre. Thus, the crop profit center total overhead was $35.44/crop acre.

That means the crop profit center had a total overhead cost of $54,188. Thus, the combined overhead for the beef cow and crop profit centers totaled $71,018.

In Figure 4, the EZ-Way graph for the spring wheat profit center indicates the $21,229 spring wheat overhead costs. Lines for the $60.06 direct cost/acre and $109.78/acre gross income are also platted.

I also generated an EZ-Way graph for the 400 alfalfa hay acres, 300 broom-clover acres and 230 acres of oat hay. Due to space limitations, I'll only summarize these here.

Though the raised alfalfa was fed to the cows, I charged the cows the $57/ton local market price for the alfalfa hay. In turn, I credited the feed crop profit center with the same $57/ton market value.

It took the profit from 316 alfalfa acres to cover the $14,176 overhead costs associated with the 400 alfalfa acres. The profits of the remaining 84 acres produced a $3,765 profit. Thus, the profit margin for farm-raised alfalfa was 15%.

Meanwhile, the graph for the broom-clover hay indicates it took the profit from 237 acres of broom-clover hay to cover the $10,632 in broom-clover overhead costs. The profits from the remaining 63 acres totaled $2,804, a 15% profit margin.

Combining the three individual profit centers, however — beef cows, cash crops and feed crops ( Figure 5) — it took the profits from the first $133,872 of gross income to cover total overhead costs. Profits from the remaining $53,244 in gross income produced $28,426 total profit for this ranch — a 15.1% overall profit margin for this ranch.

Next month, I'll focus on management changes suggested by this analysis for increasing profits on this ranch in 2003 and beyond.

Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY. Reach him at 701/238-9607 orharlan.hughes@gte.net.